Foreclosures
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How to Double Your Money Buying REO
Two types of investors exist in commercial real estate: the equity-type investor and the loan-type investor. Simply illustrated, you know the equity-type investor as a real estate investor. You know the loan-type investor as the bank. Think of the two together as investors in a property, as illustrated in the capital stack graphic. Each is invested in a $1,000,000 property. The investor commits $250,000 and the lender commits $750,000. As property values decline, investors delay and pray, borrow and extend, and hold onto the property until their equity and cash reserves are wiped out and lenders become involved in making investment decisions with commercial real estate. That $1,000,000 property is now worth $750,000. The original investor has no equity and no interest in staying involved in the property. He sends his keys to the lender. (We are in the end of the beginning of this phase of the commercial real estate market correction.) Now the bank owns the $750,000 property and needs a buyer. You call the bank and offer $500,000. You're told that that they aren't selling for any less than their $750,000. The lender begins to "delay and pray", "lend and extend", and hold onto the property until their equity and deposits are at risk. (We will enter this phase of the commercial real estate market correction in 6-12 months.) The lender hopes the market will rebound and they will sell the property equal to their initial investment or more. Fast forward 12 months. The lender owns the property and you want to buy it. You offer the lender $500,000 and they accept--regulatory agencies are in their offices asking what they're doing with their real estate owned and are ordering them to liquidate. The lender accepts your $500,000 offer.Your hard work begins. You buy the property for $500,000 and spend $250,000 in improvements, lease to new or existing tenants, and ultimately force appreciation of another $250,000 into the property, which is now worth $1,000,000. You've doubled your initial investment. Congratulations.
How would you feel about a deal with a few extra zeroes next time?
Are you looking exclusively for REO commercial real estate today? If so, email me at Jeremy@Mansardcre.com with the words "Help me find REO properties" in the subject line. Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your office for a free consultation on how to take advantage of our bank relationships to shop for REO opportunities. If there's a fit, you may retain us to source your next REO property. If there isn't a fit, we'll tell you we cannot help and will refer you to another firm that may be a better match.
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About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.
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What's a Reverse Run on the Bank?
Late last year, my friend Chris called me to ask whether he should withdraw all of his deposits from his local bank. Chris was afraid that his bank might fail and he'd lose his savings. "This isn't 1929," I said. "Your deposits are insured and the government's taking action to shore up our lending institutions to protect your deposits and to keep our banks solvent." Read more
